STRENGTHS

Political and financial support from the Gulf monarchies and Western countries

IMF Support Programme

Large gas reserves

WEAKNESSES

Poverty (40% of the population) and high unemployment

Recurring security issues in the Sinai region

Twin deficits

Banking system vulnerable to sovereign risk

Weak manufacturing exports

RISK ASSESSMENT

Pace of activity to quicken in 2019

Egyptian growth strengthened in 2018. Investment, along with more competitive exports of goods and services, were again the main drivers of activity. Economic reforms undertaken since 2016 with IMF support have restored investor confidence, especially in the energy sector. Activity is expected to continue to pick up in 2019, buoyed by the recovery in tourism, continued strong export growth and sustained public and private investment. Following Eni’s (an Italian multinational oil and gas company) discovery of the giant Zhor field in 2015, Egypt aims to become a major hub for the gas industry in the Mediterranean. Natural gas production, which covers 65% of the country's energy needs, is expected to rebound significantly in 2019. The authorities have announced the end of LNG imports following completion of Phase Two of the West Nile Delta project in the deep waters north of Alexandria, which is expected to increase production by 700 million cubic meters per day. To boost investment in the sector, the government is preparing a new contract model based on a more attractive compensation package for oil companies. Growth in the hydrocarbon sector is expected to benefit the manufacturing sector, which showed signs of improvement in 2018. Consumption is likely to rise further but at a more moderate pace, hampered by higher energy prices and the phase-out of fuel and electricity subsidies in 2019.

Ongoing fiscal consolidation

Fiscal consolidation efforts under the IMF programme have led to a gradual reduction in the government deficit. The VAT hike, moderation of the wage bill, increased customs duties, and a reduction in subsidies have enabled the authorities to achieve a primary surplus, despite a bigger-than-expected rise in oil prices. The government deficit is projected to decline further in 2019, but the government's target remains very optimistic. The aim is to get the deficit to 8.4% and the primary surplus to 2%. Strong growth combined with better tax collection should certainly favour an upturn in budgetary revenues in 2019, thus leaving more room for manoeuvre to boost investment expenditure (+40%). The increase in expenditure, which also includes some concessions made to civil servants, should be partly offset by subsidy cuts and steps to open up the capital of some state-owned companies. The abolition of fuel subsidies in 2019 and electricity subsidies by 2020/21 is expected to exert a negative effect on inflation. The Egyptian central bank could be forced to hike interest rates, mechanically raising the cost of servicing the debt, which remains largely domestic. In addition, the increase in external debt has resulted in higher exposure to currency risk at a time of stress on the emerging foreign exchange market.

Following a period of adjustment, the external accounts situation has improved significantly. The gain in competitiveness linked to depreciation of the pound has given a lift to exports (mainly oil). Tourism is expected to continue recovering, notably following resumption of the air link between Russia and Egypt, which was suspended in 2015. The increase in gas production should also help the government to contain the energy import bill despite the rise in oil prices. The current account deficit will continue to be financed by the surplus in the financial account, which is benefiting from increasing FDI and portfolio investment. As Egypt has a floating exchange rate regime, it is no longer shielded from pressures on emerging currencies that could affect the stability of the pound.

Sissi re-elected for another four years

In April 2018, Marshal Abdel Fattah al-Sissi was re-elected as head of Egypt, winning the presidential election with 97% of the vote. Without any real opposition, he faced only one challenger, Moussa Mostafa Moussa, who is actually a supporter of the President. Poor turnout, at around 41%, reflected the fact that the election was a forgone conclusion. Nevertheless, the President should now be able to continue the economic and security policies pursued during his previous terms. The regime is tightening its grip and silencing protests, justifying its actions by citing the need to stabilise the situation in Sinai and on the Libyan border. Although often criticised for failing to uphold human rights, the Egyptian regime remains a pivotal factor in regional stability and the fight against terrorism. President Sissi wants to restore the country's leading role in the Middle East by maintaining close relations with Europe and the United States on the one hand, while strengthening ties with Russia on the other. At the same time, the country intends to rely on its backers in the dispute with Ethiopia over the Nile River dam project, which would deprive Egypt of some of its water resources.